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Smaller hedge funds have outperformed their larger rivals over the last 16 years, according to an exhaustive study of over 20,000 funds by a team at the Imperial College of London.

The Risk Management Laboratory at the Imperial College of London’s business school used figures from research providers BarclayHedge, EurekaHedge, Hedge Fund Research, Morningstar and Tass in a bid to confirm previously studied trends in the industry.

They presented their findings at panel event in London this week.

The combined database, which the centre plans to update several times a year, includes 24,749 unique hedge funds and 48,121 share classes, covering the period from 1994 to 2010.

It shows that funds with assets under management of less than $10m delivered average annual returns of 9.89%, while those managing between $250 to $500m returned of 4.84%. Funds with between $500m and $1bn had average yearly returns of 5.84% and those with more than $1bn in assets delivered 5.45%.

The same was largely true for alpha, or the excess return; funds with less than $10m in assets under management delivered alpha returns of 7.25% per year; those with $250m to $500m posted 1.59%; those with $500m and $1bn delivered 2.8%; and funds with more than $1bn had alpha of 1.58%.

Robert Kosowski, director of the Risk Management Laboratory who co-authored a paper on the merged databases, said: "When there is evidence of performance persistence, it seems to be driven by small funds, not large funds."

The industry as a whole ultimately added value over the last 16 years, researchers found, pointing to an annual average value-weighted return of 7.36%. The study also found that younger funds outperformed older rivals and that those with management incentives performed better than those without.

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Kosowski underscored the challenges involved in hedge fund data such as reporting biases and missing information on assets under management, both of which can skew results and not paint a full picture of a given fund or the larger industry. He stressed the importance of using multiple databases in drawing conclusions.

Despite the number of funds and share classes covered by the data, the Risk Management Laboratory at Imperial College found that only 3.7% of all hedge fund share classes appeared in all five databases, highlighting the lack of consistency across various data sources. Nearly two thirds of all fund share classes were only covered by one database.

The researchers are still working on a total figure for the assets under management in the industry.

Experts speaking at the panel event this week attributed the stronger performance of younger funds to factors such as their ability to move quickly in and out of markets and the fact that their managers oversee a limited number of funds.

Jeroen Tielman, founder and chief executive of seeding firm IMQubator, said: “If you have one moment to prove yourself in the market, you’re going to do everything in your power to perform well."

Panellists nevertheless highlighted the challenge that smaller funds face in securing investments from institutional groups with more rigid risk management requirements, as these tend to favour firms with longer track records.

David Yim, director at KPMG, who works with firms that invest in hedge funds, said: “Established managers have a momentum. What it all boils down to is that they want a return on their investment given a certain risk appetite."